Leave Granted in Nova v Dow

Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, affg 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE, SURPASS

The SCC has granted leave to appeal in Nova v Dow. I’ve written several posts on the FCA decision:

Nova v Dow: A Radical Departure from Established Law

Constructing the “But For” World Is Not a Purely Subjective Inquiry

Non-Infringing Baseline as an Alternative to “But For” Causation

Deduction of Fixed Costs in Nova v Dow

Fixed Costs and Sunk Costs

Hat tip to Alan Macek’s IPPractice daily email service.

You Can’t Have Your Non-infringing Alternative and Eat it Too

Hospira Healthcare Corporation v The Kennedy Trust for Rheumatology Research 2020 FCA 191 Gleason JA: Stratas, Laskin JJA aff’g 2019 FC 1252 & 2019 FC 1253 Phelan J

            2,261,630 / infliximab / INFLECTRA

In the liability phase of Hospira v Kennedy Trust 2018 FC 259 var’d 2020 FCA 30 Hospira and others were found to have infringed the 230 patent by making and selling INFLECTRA, an infliximab biosimilar of REMICADE [FC 16-17]. They also had a second drug, REMSIMA, also an infliximab biosimilar. During the liability phase Hospira took the position that REMSIMA was the same as INFLECTRA in material respects and the liability trial proceeded on that basis [2]. During the damages phase of the proceedings, Hospira sought to amend its Statement of Issues to assert that REMSIMA was a non-infringing alternative, which it claimed disentitled the patentee to damages [2]. Phelan J, in unreported decisions, held that the proposed amendments were abusive as being a radical departure from the position taken by Hospira in the liability phase, and undercut the basis upon which the proceeding had taken place [5]. The FCA has now affirmed. The FCA noted that “While there may well be cases where a party may set out an alternative for the first time as part of the ‘but for’ world in the damages phase of a patent infringement matter, this is not one of them” [5].

Non-Infringing Baseline as an Alternative to “But For” Causation

Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE SURPASS

In an accounting of profits the infringer is required to disgorge its profits caused by the infringement. In the standard approach causation is determined using the “but for” test, in which the amount the infringer actually earned by using the infringing technology is compared with what the infringer would have earned in the hypothetical “but for” world in which it used the best non-infringing option: Schmeiser 2004 SCC 34 [102]. As explained in last week’s post, Stratas JA’s decision for the majority in Nova v Dow rejected “but for” causation in the context of an accounting of profits. He proposed instead to assess the profit to be disgorged by comparing the infringer’s actual profit against a non-infringing “baseline,” which, in his view, better reveals the value added by the invention itself [62], which is to say the value associated with the “inventive quality” of the patented technology [78]:

[73] Non-infringing alternatives are used not to determine what the infringer could have done instead of infringing (i.e., “but for” reasoning), but instead to establish a non-infringing baseline to isolate the value of the patent.

Stratas JA did not provide an explicit definition of the non-infringing baseline, but rather illustrated its nature with one or two examples. While I appreciate the intuition underlying Stratas JA’s examples, the rule under established law is that the infringer must disgorge the profits caused by the infringement, not the profits associated with the inventive quality of the patented technology. The established “but for” test isolates the profits caused by the infringement and in my view this is sound as a matter of policy.

Stratas JA emphasized the need for a causal nexus throughout his decision, but he made the point in a couple of subtly different ways. In many places he emphasized the need for “a causal connection between the profits to be disgorged and the patent infringement” [46]; and see similarly [27], [32]. In other places he stated that the disgorgement of profit “must focus on the value added by the invention itself” [62]; and see similarly [61] (“causally attributable to the value of the patent”), [78] (quoted below). I’ll argue that there is a difference between these two ways of framing the causation requirement, and that the first is correct while the second is not.

First we need to understand what Statas JA meant by the “value added by the invention itself.” He gave a couple of examples to illustrate what he meant:

[64] What is the value of a patented pain reliever that provides eight hours and one minute of pain relief when there is a non-infringing alternative that provides eight hours of relief? The patentee did not invent pain relievers; the patentee only invented a drug that added an extra minute of relief.

In this example, the pain reliever that provides eight hours of relief is the “baseline” against which the value of the patented pain reliever is to be assessed. To the extent that the eight hour pain reliever is readily available on the market, “but for” causation and the non-infringing baseline give the same result. But for the infringement, the infringer would have used the eight hour pain reliever, and the benefit from the patent is the extra one minute of pain relief, which is also identified by Stratas JA as the value of the patent. Stratas JA’s suggestion at [73] that non-infringing alternatives have really been used to establish a non-infringing baseline seems to be saying that in many cases, such as the pain-reliever example, “but for” reasoning does end up with the correct “baseline” comparator.

Constructing the “But For” World Is Not a Purely Subjective Inquiry

Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE SURPASS

In an accounting of profits the infringer is required to disgorge its profits caused by the infringement. In the standard approach causation is determined using the “but for” test, in which the amount the infringer actually earned by using the infringing technology is compared with what the infringer would have earned in the hypothetical world in which it used the best non-infringing option: Schmeiser 2004 SCC 34 [102]. As explained in last week’s post, Stratas JA’s decision for the majority in Nova v Dow rejected “but for” causation in the context of an accounting of profits. In so doing, he gave two thought-provoking examples which raise foundational questions regarding the nature of the “but for” world. In this post and the next, I will argue that it is not necessary to reject “but for” causation in order to address the issues raised by Stratas JA’s examples.

The first example, which is the subject of this post, raises the issue of whether the law takes a subjective or objective approach to the infringer’s behaviour in the “but for” world. As I understand Stratas JA’s analysis, he is of the view that the “but for” test for causation requires a purely subjective inquiry into what the particular infringer would have done but for the infringement. I will argue that on the contrary, “but for” causation often incorporates an objective element, both in the law generally and in the patent context. I will suggest that the prior caselaw is consistent with an approach in which the “but for” world is constructed by asking what an informed and prudent party in the position of the infringer would have done but for the infringement. Such an approach would address the concerns raised by Stratas JA’s first example.

To turn to the details, Stratas JA provides two examples to illustrate the proposition that “[t]he use of hypotheticals and the ‘but for’ test . . . has no place in an accounting of profits” [67]. In the first, the infringer, but for the infringement, would have invested in speculative stocks:

[69] For example, if an infringer could prove in evidence that, but for the infringement, it would have used its capital to invest in, say, Apple or Amazon before their market ascendance then the infringer could retain the vast majority, if not all, of its profits. But for the infringement, the infringer would have earned much more investing in Apple or Amazon than selling the infringing goods. By Professor Siebrasse’s “but for” logic, the infringer would not have to disgorge anything because using the infringing product was actually detrimental to the infringer’s overall profitability.

[70] The reality is that infringers may not always pursue the next best non-infringing alternative. It may be the case that without access to the patented product, the infringer might have pursued an entirely different course, for example, speculative investments in emerging tech companies, and would have lost everything.

I’ll call this the Apple / Amazon example. The reference is to my 2004 article, “A Remedial Benefit-Based Approach to the Innocent-User Problem in the Patenting of Higher Life Forms” (2004), 20 CIPR 79, that was cited with approval in Schmeiser [102].

Stratas JA emphasized throughout his decision that an accounting requires disgorgement of all profits caused by the invention, and only profits caused by the invention: [27], [32], [39], [46], [61], [ 62]. I agree. Stratas JA is evidently of the view that the value of the patented seed does not depend on whether, but for the infringement, the infringer would in fact have invested in Apple at its nadir or Yahoo at its peak. Again I agree. More broadly, I take his point to be that the value of the invention should not necessarily be assessed on solely the basis of a strictly factual inquiry as to what the particular defendant would have done but for the infringement. Here again, I agree.

However, Stratas JA offered this example to show that “[t]he use of hypotheticals and the ‘but for’ test . . . has no place in an accounting of profits” [67]. That is, Stratas JA is evidently of the view that the “but for” test for causation does not get us to the right result in the Apple / Amazon example: “By Professor Siebrasse’s ‘but for’ logic, the infringer would not have to disgorge anything because using the infringing product was actually detrimental to the infringer’s overall profitability” [691]. From this I infer that Stratas JA is of the view that the use of a hypothetical “but for” test for causation necessarily entails a subjective approach, requiring an inquiry as to what the particular infringer would have done had it not infringed; therefore, in his view, if the inquiry is not subjective, it is necessary to reject the “but for” test for causation. This is where I disagree. The law of causation permits the use of an objective approach, or at least an objective element, in assessing the defendant’s behaviour in the “but for” world, and the concern raised by the Apple / Amazon example can be addressed within the standard framework by using an approach that asks how a reasonable infringer in the position of the defendant would behave.

Now, a purely subjective approach is not as unreasonable as it might appear at first impression, notwithstanding the intuitive appeal of the Apple / Amazon example. If a purely subjective approach were used then in some cases, as Stratas JA pointed out, the profits to be disgorged would be much less than the true value of the invention; an inventor who, but for the infringement, would have gambled and won, would be better off than one who had invested prudently [69]. On the other hand, as Stratas JA also pointed out, in some cases the award would be higher than the true value of the invention, in cases in which the infringer would have gambled and lost [70]. In theory, this should all come out in the wash. Sometimes the infringer would win, sometimes it would lose, but these random deviations from the true value of the invention would all average out. Since the patent incentive is prospective, the expected return to invention would stay the same and incentive function of the patent system would not be impaired.

However, there are two second order problems with a purely subjective approach. First, on the facts of any given case, the award might fail to reflect the value of the invention if the infringer would have behaved idiosyncratically. If a patentee received half the value of their invention, it would be cold comfort to tell them that some other patentee in some other trial would get twice what they deserved. Similarly, an infringer hit with an award much greater than the value of the invention to them would not appreciate being told, “Don’t worry, some other infringer will get off scot free.” Second, there is a selection bias problem. Patentees who anticipated that the accounting award would be unduly low as a result of idiosyncratic behaviour by the infringer would elect damages instead. This means that it would not all come out in the wash: the accounting cases would disproportionately reflect cases in which the infringer would be required to disgorge more than the value of the invention.

Thus, I agree that the Apple / Amazon example raises a real problem. But the solution is not to abandon “but for” causation. Rather, it is to use an objective approach to the infringer’s behaviour in the “but for” world.

So, in Mustapha 2008 SCC 27, the defendant owed a duty to the plaintiff and breached its duty by supplying bottled water with a dead fly in it. This in fact caused significant mental harm to the plaintiff. While the trial judge awarded damages, the SCC reversed, holding that the damages suffered were too remote to be viewed as legally caused by the defendant’s negligence, unless it could be shown that “a person of ordinary fortitude” would suffer serious injury in the same circumstances: [18]. Thus, the trial judge erred by applying a subjective standard—looking solely to the effect on the particular plaintiff—when an objective standard—looking to a person of ordinary fortitude—should have been used. Now, Mustapha was a negligence case, and foreseeability considerations are not relevant in intentional torts, and have not generally been raised in patent infringement. But the broader point is simply that “but for” causation does not inherently require a subjective inquiry into the effect of the wrong on the particular defendant.

Nor is the “but for” inquiry purely subjective in patent law generally. For example, if a patentee cannot prove damages in the form of lost profits, it is entitled to damages in the form of a reasonable royalty. The reasonable royalty is determined on the basis of a hypothetical negotiation between the infringer and the patentee at the time of the infringement. This hypothetical negotiation is not simply a reconstruction of what would have in fact happened but for the infringement; on the contrary, it is commonly applied when it is clear on the facts that the patentee would have refused to licence to the infringer on any terms. As the en banc Federal Circuit remarked in the leading case of Rite-Hite v Kelly 56 F3d 1538, 1554 n13 (Fed Cir 1995), the “willing licensor/willing licensee” characterization is “inaccurate, and even absurd, when, as here, the patentee does not wish to grant a license.” Moreover, it is well established, at least in US law, that the parties to the hypothetical negotiation are taken to bargain on the basis that the patent was valid and infringed, even though parties to an actual negotiation would not have known that the patent was valid and infringed, and so would normally be expected to allow a discount to allow for the possibility of invalidity. As another example, it would seem that a patented alternative will not be considered a legitimate alternative, even if the infringer would in fact have used it: see Cefaclor 2018 FCA 217 [55] and here.

The problem of idiosyncratic defendant behaviour specifically has also been raised in the patent infringement context. In Cefaclor 2018 FCA 217 the question was whether the putative NIA would have been economically viable. Gauthier JA for the FCA held that while the subjective perspective of the infringer may be relevant [72], it is not determinative (original emphasis):

[72] In my view, economic viability is not something that is assessed solely from the subjective perspective of an infringer such as Apotex. . . .

[73] However, as I noted earlier, the court’s goal is to assess the real value of the patented invention(s). Such value cannot be assessed on a purely subjective basis. Evidently, the court must be satisfied that the NIA invoked was objectively an economically viable substitute at the relevant time. To say otherwise would mean that the value of a patent could be artificially reduced by an infringer who behaves in an unorthodox manner, or whose adoption of a substitute is motivated by reasons other than economic ones.

This seems to me to be a direct answer to the Apple / Amazon example. Gauthier JA identified exactly the same problem raised by Stratas JA, and addressed it by holding that a purely subjective approach to the “but for” world should not be used.

With that said, I do not want to endorse a strictly objective approach to the defendant’s behaviour in the “but for” world. The main difficulty with an objective test is determining what is in fact objectively reasonable. As Gauthier JA pointed out in Cefaclor, what the particular infringer would have done helps inform what a reasonable party in the same position would have done [72]. If the actual infringer is in fact reasonable, then the two inquiries will give the same result. In the business context, at least, it is probably sound to presume that the particular infringer was reasonable: see here. That means that even if we adopt an approach to infringer behaviour in the “but for” world that is objective in principle, a subjective inquiry will almost always be necessary and will often be determinative. In most cases it will difficult to disentangle whether the inquiry is subjective or objective, and unnecessary to do so.

So, my point here is not to argue for a specific objective test. Rather, my argument is simply that it is not necessary to entirely reject “but for” causation to deal with the issue of idiosyncratic infringer behaviour. The “could have and would have” test for assessing whether a putative non-infringing alternative may be considered was originally set out in Lovastatin 2015 FCA 171. While that test continues to develop through the case law, it provides a good framework for balancing subjective and objective considerations in constructing the “but for” world. Consequently, in my view the existing legal framework of “but for” causation is entirely capable of addressing the problem raised by the Apple / Amazon example.

I’ll end with a couple of tangential notes. First, the issue of a subjective or objective approach to the “but for” world was not decided in Schmeiser. The question in Schmeiser was the whether the entire actual profits were to be disgorged or only the differential profits. It did not purport to settle all the details of the way in which the differential profit approach should be applied, in the same way that the SCC’s endorsement of “but for” causation in Athey [1996] 3 SCR 458 did not settle the precise nature of the test in the context of psychological injury that was addressed in Mustapha. Second, it is not clear to me why Stratas JA was of the view that the logic in my 2004 article would imply a subjective approach [69], given that the description I gave in the passage quoted by Stratas JA at [68], suggested that the touchstone would be an objective one, of a defendant acting in “a prudent and informed manner” while trying to maximize its profit without infringing. With that said, I have to admit that my suggestion of an objective test in my 2004 article was largely fortuitous, as the focus of my argument was that the differential profits should be disgorged, and not the entire actual profits. In any event, the issue needs to be addressed in light of the case law as it has developed since Schmeiser, in cases in which these problems arise on the facts.

 

Nova v Dow: A Radical Departure from Established Law

Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE, SURPASS

The decision of Stratas JA for the majority in Nova v Dow raises a panoply of important conceptual and practical issues related to an accounting of profits, and non-punitive monetary remedies more broadly: whether the test for causation is the same in an accounting and damages; whether an accounting should provide a disincentive to infringe; the nature of the non-infringing alternative in the “but for” world; whether the hypothetical world should be constructed on subjective or objective terms; the role of opportunity costs; and the deductibility of fixed costs. And this is not to mention other less foundational but nonetheless significant issues of disgorgement of springboard profits and the date for currency conversion. Unfortunately, this decision is not likely to settle any these issues; on the contrary, it is likely to increase uncertainty in this entire area of law.

In a series of decisions, following from the seminal decision of the SCC in Schmeiser, 2004 SCC 34, the FCA has built up what I consider to be a sound and principled approach to non-punitive remedies: see Lovastatin Damages 2015 FCA 171; Venlafaxine s8 2016 FCA 161; Perindopril Accounting #1 2017 FCA 23; Cefaclor Damages 2018 FCA 217; Perindopril Accounting #2 2020 FCA 60. While some important loose ends remain outstanding, the foundations were solid. Stratas JA’s decision for the majority in Nova v Dow has thrown a grenade into that edifice and rattled it down to those foundations. The general statements of principle set out by Stratas JA constitute, in my view, a radical and unsound departure from established principles, including those set out by the SCC in Schmeiser. Some specific holdings might be seen as refinements of prior law, but even then, because of the unorthodox reasoning, it is not clear whether even these points can now be considered settled.

The “Would Have” Branch of the Non-Infringing Alternative Analysis

Apotex Inc v ADIR 2020 FCA 60 Mactavish JA: Webb, Near JJA aff’g 2018 FC 346 Gagné J
            1,341,196 / perindopril / COVERSYL

In this decision the FCA affirmed Gagné J’s holding that Apotex had not established a non-infringing alternative defence in respect of an accounting of profits. I was very critical of Gagné J’s holding in my post on her decision, on the view that what I called “Dr Sherman’s idiosyncratic non-economic motivations,” should not have been taken into account, as doing so meant that the amount awarded as an accounting would not reflect the true economic value of the invention. On reading the FCA decision, I now see that my criticism was not entirely well-founded. On the one hand, the FCA decision reinforces the view that the “would have” branch of the NIA test is and should be focused on economic considerations; but on the other hand, I now see that the motivations taken into account by Gagné J actually were economic in nature.

The perindopril litigation started with 2008 FC 825 aff’d 2009 FCA 222, holding that ADIR’s 196 patent was valid and infringed by Apotex. ADIR elected an accounting, and the profits portion of the action has gone back and forth between the FC and FCA a couple of times. Gagné J’s initial decision refusing to consider the availability of a non-infringing alternative was decided just before the NIA defence was accepted by the FCA in Lovastatin Damages 2015 FCA 171 and Effexor / Venlafaxine 2016 FCA 161: see Perindopril Profits #1 2015 FC 721 rev’d in part and remanded by Perindopril Profits #1 Appeal 2017 FCA 23, discussed here. The remand gave rise to the decision under appeal, which we might as well call Perindopril Profits #2, making this FCA decision Perindopril Profits #2 Appeal.

Patentee That Did Not Sue in the Real World Cannot Say it Would Have Done So in the “But For” World

Pfizer Canada ULC v Pharmascience Inc 2020 FCA 55 Laskin JA: Dawson, Stratas JJA aff’g 2019 FC 1271 O’Reilly J
            2,255,652 / pregabalin / LYRICA

The first half of this decision straightforwardly affirms O’Reilly J on an essentially factual point. The second half has some comments on legal points that I find quite puzzling, though I expect this is simply because the specific arguments the FCA was responding to were not fully set out in this brief decision.

The decision arises out of Pharmascience’s action for damages under s 8 of the NOC Regulations, brought after Pfizer lost in NOC proceedings aimed at keeping Pharmascience out of the pregabalin market. Such damages are assessed using the established “but for” test for causation, under which Pharmascience’s actual sales are compared with the sales it would hypothetically have made had it not been kept off the market during the statutory stay period triggered by NOC proceedings. Pfizer responded by arguing that Pharmascience was disentitled to damages “because the hypothetical sales of PMS-pregabalin would have infringed Pfizer’s patent” [FC 2]. However, Pfizer had never actually sued Pharmascience after Pharmascience launched, and the evidence was that it would not have done so even if Pharmascience had obtained its NOC at the outset of the statutory stay period [FC 3], [3]. Invoking the principle that “the but-for world should reflect, to the extent possible, what happened in the real world,” O’Reilly J held that Pfizer’s defence was not viable [FC 5, 23]. In my view, as discussed here, O’Reilly J’s holding was correct for the reasons he gave. The FCA has now affirmed, “substantially for the reasons given by the Federal Court” [6]. This much is straightforward.

Legitimate NIA Must Not Infringe Any Patent

Apotex Inc v Eli Lilly and Co 2018 FCA 217 Gauthier JA: Gleason, Laskin JJA aff’g 2014 FC 1254 Zinn J [Cefaclor Damages]
            1,133,007 – 1,146,536 – 1,133,468 – 1,150,725 [Lilly Patents]
            1,095,026 – 1,132,547 – 1,136,132 – 1,144,924 [Shionogi Patents]

As discussed in yesterday’s post, the key issue in Cefaclor Damages was the extent to which Apotex could rely on the Lupin 2 process for making cefaclor as a non-infringing alternative (NIA) in assessing damages. A legitimate NIA must of course be non-infringing in the sense of not infringing the patents at issue; but in this case the FCA held that neither can it infringe other patents. This appears to be a novel legal point [55], which arose from the unusual facts of the case.

Apotex imported and sold cefaclor produced by by South Korean drug maker Kyong Bo and Indian company Lupin. Lilly alleged that all of it infringed the patents at issue. The Lupin product was imported in a few different batches, and Gauthier J ultimately held that the Lupin product was produced by (essentially) two different processes, Lupin 1 and Lupin 2 [FC 15]. At the liability phase, Lilly did not prove that Lupin 2 infringed; indeed, Lilly never even argued that Lupin 2 infringed, because Lilly’s position was that the Lupin 2 process was so inefficient that it could not have been used [56]. No doubt that was a reasonable position at the liability phase, but having lost on that point, in the reference phase Lilly had to accept that the last shipments of Lupin cefaclor were produced using the Lupin 2 process. At the reference phase, Lilly argued, for the first time, that the Lupin 2 process infringed an entirely separate Lilly patent, the 646 patent. Understandably, the 646 patent patent was not in issue at all in liability phase [60], given that Lilly didn’t believe the process it covered was being used [56].

Lilly raised the 646 patent, not to establish that the Lupin 2 process infringed the 646 patent, so as to give rise to damages for sale of the Lupin 2 cefaclor, but rather to preclude Apotex from raising the Lupin 2 process as an NIA in the assessment of damages for the Kyong Bo and Lupin 1 cefaclor. This argument was not addressed by Zinn J, apparently because of his view that the NIA defence was not available as a matter of law [59].

Thus the point was addressed for the first time by the FCA. The FCA held that [55, my emphasis]:

It goes without saying that to be a real alternative, an NIA must be lawful, that is to say, non-infringing. This applies to more than just the patent(s) in suit in the proceedings”

The matter must of course be put in play by the patentee—it is not for the infringer to establish that there is no patent in the world that it might have infringed [57], [61], [65]. Once the issue is in play, it is for the infringer “to explain or produce evidence explaining why, despite the reference to this unexpired patent, the NIA on which it sought to rely on was in fact lawful” [65]. It would seem that not very much is required to put the issue in play, though that may be due to the unusual facts [62].

This basic holding strikes me as sound in principle, though different facts might raise questions. In this case, Lilly owned the 646 patent, so it goes without saying that it would not have licensed the technology to Apotex. But what if the 646 patent had been owned by a third party, which was routinely willing to licence it to all comers at a set royalty? What if the 646 patent had been owned by a third party, which did not routinely licence it, but might have been willing to do so? I won’t explore those questions here, except to say that I do not think they are settled by this decision, which, as Gauthier JA noted, turned on its unusual facts [4].

There is also a separate point respecting the burden of proof, which relates to the patents that were in issue. As noted, at the liability phase, Lilly had never argued that the Lupin 2 process infringed the patents that were in issue (because its position that the Lupin 2 process was not actually being used), nor did Gauthier J make such a finding. Instead, she held only that Lilly had not established that it infringed [56]. At the reference phase, Lilly wanted to re-open this issue. If I understand correctly, the basis for the argument is that the burden is different: while it was for Lilly to prove infringement at the liability stage, at the reference stage, Apotex had the burden of proving that it had an NIA available, including that the NIA was non-infringing. Zinn J rejected this, on the basis that the matter had been decided in the liability phase [61], and the FCA has affirmed that the issue cannot be re-opened [58].

In the result, Gauthier JA concluded that the Lupin 2 process prima facie infringed the 646 patent [64], and Apotex had not countered the prima facie case, and in consequence, the Lupin 2 process could not be a legitimate NIA [69].

A Non-Infringing Alternative Must Be Objectively Economically Viable

Apotex Inc v Eli Lilly and Co 2018 FCA 217 Gauthier JA: Gleason, Laskin JJA aff’g 2014 FC 1254 Zinn J [Cefaclor Damages]
            1,133,007 – 1,146,536 – 1,133,468 – 1,150,725 [Lilly Patents]
            1,095,026 – 1,132,547 – 1,136,132 – 1,144,924 [Shionogi Patents]

In the liability phase of this bifurcated action, Cefaclor Liability 2009 FC 991 aff’d 2010 FCA 240, Gauthier J held that at least one valid claim of each of the eight patents at issue was infringed by Apotex. In the damages phase, Zinn J awarded Lilly damages in the form of lost profits and a reasonable royalty, plus compound interest as a head of damages. Gauthier JA, writing for the FCA, has now affirmed Zinn J’s award, except in respect of the assessment of interest. The main issue was the role of the non-infringing alternative (NIA), in assessing damages. Gauthier JA stated that no new questions of law were raised, and she warned that “The facts of this case are so unusual that it would be unwise to use them as a backdrop for stating general principles of law” [4]. However, basic principles are sometimes brought into clearest focus by unusual facts, and this decision clarified several points of general interest relating to the so-called NIA defence. (I don’t like the term NIA “defence,” but it now seems to be established, so I will give up and start using it.) This post provides an overview of the facts, and addresses the holding that the NIA must be objectively economically viable.

There were three processes used to make the cefaclor imported and sold by Aptoex: Kyong Bo, Lupin 1 and Lupin 2. The first two processes were infringing, but the Lupin 2 process was not. (More precisely, Lilly did not prove that Lupin 2 infringed [56].) The reference was therefore to establish damages for infringement in respect of the Kyong Bo and Lupin 1 cefaclor. The last infringing product was imported in June of 1998; after that, Apotex imported Lupin 2 cefaclor.

The key question on appeal was the extent to which Apotex could rely on Lupin 2 cefaclor as an NIA. At first instance, Apotex had argued that an NIA defence was available, and that damages should be assessed on the basis it would have entered the market with Lupin 2 product even before June, 1998, when it actually began selling Lupin 2 cefaclor. (Specifically, on appeal Apotex argued that it would have legal cefaclor available as early as October 1997 [38], which is when Apotex concluded internally that its Lupin 1 and Kyong Bo cefaclor were infringing: [44i].)) Zinn J rejected this on the basis that the NIA defence was not available as a matter of law [FC 57]. In the alternative, Apotex argued that damages should be assessed on the basis that in the “but for” world, it would have entered the market with Lupin 2 product in June of 1998, as it did in the real world. Lilly, on the other hand, argued that Apotex would not have come to market with legal cefaclor prior to the expiry of the infringed patents in July of 2000 [FC 59-60]. Zinn J found in favour of Lilly on this point as well [70]. While FCA decisions subsequent to Zinn J’s decision on the reference have established that Zinn J erred in rejecting the NIA defence as a matter of law [42], [46], the FCA nonetheless upheld Zinn J’s award on that basis that the NIA defence was not available on the facts, and moreover that Zinn J had not erred in finding that in the “but for” world, Apotex would not have entered until the market until the expiry of the last patent at issue.

Economic Viability of the NIA
A key issue related to the economic viability of the Lupin 2 process. The Lupin 2 process was substantially more expensive than the infringing Kyong Bo or Lupin 1 processes, and on the evidence, it would not have been commercially viable to enter the market with Lupin 2 cefaclor [78]. This was relevant because Apotex had tendered evidence that its business decisions were not motivated by profitability, but rather by a desire to have a broad portfolio of products [FC 68], [102]. Thus, Apotex wanted to argue that it would have entered the market with the Lupin 2 process, even though it would have lost money doing so. That would of course reduce the damages, because Lilly’s profits would be much greater in a world in which it had market exclusivity than one in which it faced strong competition from Apotex, even if Apotex would have been losing money.

Gauthier JA provided a summary of general principles regarding the NIA defence at [47]-[53]. While the entire discussion is helpful, I would highlight one passage that is important both as a general principle, and in respect of this particular issue (my emphasis):

[49] With this in mind, I underscore that the objective of the NIA “defence” is to help ascertain the real value of inventions for which a patentee such as Lilly was granted a monopoly. Inasmuch as overcompensation is inappropriate in our law, so is undercompensation. Thus, the goal is not to enable an infringer to breach the bargain made on behalf of the Canadian public when a patent is issued. Nor is the defence a means by which one can infringe at the lowest possible cost.

This is a crucial point, which, in my view, is entirely sound. There are really two points here. First, the objective of the NIA defence is to ascertain the real value of the invention. The patent system is intended to provide an incentive to develop inventions for the benefit of the public, by providing a reward which is commensurate to the value of the invention. A process may be patentable as being new and inventive, and yet provide no economic advantage over existing processes. Such a process is not as socially valuable as one which dramatically reduces the cost of product. A process which does provide a dramatic cost saving will provide a greater reward in the marketplace; the NIA defence is a legal tool for ensuring that it provides a greater reward in terms of damages as well. The second point is that the objective of the NIA defence is to “help” ascertain the value of the invention. It is only a tool — a means to an end. The NIA defence needs to be developed in a manner which is consistent with that ultimate goal; if there is a conflict, it is the larger goal of ascertaining the real value of the invention which must prevail.

In addressing Apotex’s argument that it would have entered the market even with an unprofitable product, Gauthier JA emphasized this point (original emphasis):

[73] [T]he court’s goal is to assess the real value of the patented invention(s). Such value cannot be assessed on a purely subjective basis. Evidently, the court must be satisfied that the NIA invoked was objectively an economically viable substitute at the relevant time. To say otherwise would mean that the value of a patent could be artificially reduced by an infringer who behaves in an unorthodox manner, or whose adoption of a substitute is motivated by reasons other than economic ones.

I read this as saying that economic viability of the NIA is a prerequisite to invoking the NIA defence as a matter of law, even if on the facts the infringer would have acted in an economically irrational manner had it not infringed. In my view, this is entirely sound. As noted above, and as emphasized by Gauthier JA, the NIA defence is a tool for assessing the real value of the invention. The real social value of the invention is an objective fact, which does not depend on the idiosyncracies of the particular infringer.

Gauthier JA also noted that:

[72] In my view, economic viability is not something that is assessed solely from the subjective perspective of an infringer such as Apotex. But obviously, the subjective perspective of the infringer may be relevant to the question of whether the infringer “would” have used the NIA.

As I read it, this says that the NIA must be objectively economically viable as a threshold matter; but it may be that even an objectively economically viable alternative would not be used as an NIA, if, on the facts, it would not have been used by the infringer for subjective reasons. I’m not sure I agree with that position, as it seems to me to be at odds with the view that damages should relate to the true value of the invention, not to idiosyncracies of the infringer. This question arose in ADIR v Apotex 2018 FC 346, in which Gagné J held that Apotex could not argue that it would have manufactured abroad for sale in the UK and Australia, even though doing so was technically possible and economically viable. Gauthier JA’s remarks in [72] appear to be indirectly approving of that  holding. Nonetheless, I have significant reservations, as discussed here. With that said, this is an issue which is better explored when it arises on the facts.

Non-infringing Alternative and Non-economic Factors

ADIR v Apotex Inc 2018 FC 346 Gagné J
            1,341,196 / perindopril / COVERSYL

This decision concerns the accounting of profits portion of a bifurcated trial. In the liability decision, Apotex had been held liable for infringement and Servier elected an accounting: 2008 FC 825 aff’d 2009 FCA 222. A substantial amount of the infringing material manufactured by Apotex in Canada was destined for export to markets such as the UK and Australia. In the accounting portion of the trial, Apotex argued that it had a non-infringing alternative (NIA) which would have allowed it to compete in those markets, namely by sourcing perindopril from third party manufacturers based outside Canada. Apotex argued that the profits it would have made by manufacturing abroad should be deducted from the profits actually made by the infringing manufacture in Canada, to arrive at the differential profit to be disgorged. As discussed here, Gagné J rejected consideration of the NIA as a matter of law: 2015 FC 721. Her decision was delivered prior to the FCA decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161, in which the FCA affirmed the need to consider any non-infringing alternative in the causation analysis (as discussed here, here and here). It was therefore unsurprising that the FCA allowed Apotex’s appeal in part, remanding on the NIA issue: 2017 FCA 23 Perindopril Accounting FCA rev’g in part and remanding 2015 FC 721 (here). 

The sole question in this decision on remand was “whether any of Apotex’s profits from export sales of perindopril could have and would have been realized through use of a non-infringing alternative [NIA],” with a consequent reduction in the amount to be disgorged [2]. In a striking application of the “would” branch of the test, Gagné J held that even though Apotex could have sourced non-infringing perindopril from a third party, albeit with a delay of one year, it would not have done so. Consequently, no reduction was ordered in the award of $56,000,000 plus interest.

Does an NIA Need to Be Proven on the Balance of Probabilities

AstraZeneca Canada Inc v Apotex Inc 2017 FC 726 Barnes J [Omeprazole Accounting]
            1,292,693 / omeprazole formulation / LOSEC

Yesterday’s post provided an overview this decision, and dealt with the non-infringing alternatives developed for litigation. Apotex also proposed that it could have sourced non-infringing product from two third parties, Estevé and Kudco.

Kudco presents an important issue. Kudco held the US rights to a non-infringing omeprazole formulation under license from a French company. Kudco executives testified that they would have had the authority to supply product to Apotex for sale in Canada [174], and that they would have been willing to do so if a deal could be reached [177]. Nonetheless, Barnes J did not accept this as an available alternative, primarily because, on the facts, he held that it was more likely than not that a deal would not have been reached between the parties, because Kudco would have asked more than Dr. Sherman would have been willing to pay [191].¹ Barnes J therefore held (my emphasis):

[192] I am not, therefore, satisfied that Apotex is more likely than not to have entered into some form of licensing agreement with Kudco during the infringing period. If I am wrong about the standard of proof that applies such that the test in Athey v Leonati, [1996] 3 SCR 458, 140 DLR (4th) 235, is applicable, I would fix the possibility of reaching an agreement with Kudco to supply the Canadian market by the beginning of the infringing period at 15% and at a royalty rate of 35% on Apotex’s net sales.

In both Lovastatin [74] and Venlafaxine 2016 FCA 161 [56], the FCA held that the burden lies on the defendant to establish the factual relevance of a non-infringing alternative on the balance of probabilities. In both cases the FCA cited as authority Rainbow Caterers [1991] 3 SCR 3, 14, which does indeed say that. The problem, as I have discussed, is that Athey v Leonati [1996] 3 SCR 458, [27] says “Hypothetical events . . . need not be proven on a balance of probabilities. Instead, they are simply given weight according to their relative likelihood” (my emphasis). It is not clear to me whether these two holdings can be reconciled. Moreover, the point was thinly reasoned in Rainbow Caterers, and fully reasoned in Athey v Leonati, and the relative likelihood approach appears to be accepted and routinely applied in most other areas of law, eg personal injury.

Because Barnes J made a specific finding as to the relative likelihood of the hypothetical event for the Kudco NIA, and because Apotex failed in respect of all the other NIAs, if there is an appeal, this squarely raises the question of whether the FCA should revisit this question in light of the broader SCC jurisprudence. I am not criticizing the FCA for having followed Rainbow Caterers in the first place. It is SCC authority which does stand for that proposition on this point, and moreover, the point was conceded by Apotex in oral argument: Lovastatin [74]. But on fuller consideration, Rainbow Caterers may not be the best authority.

It seems the issue really only arises in respect of the Kudco NIA. On the relative likelihood approach, a hypothetical possibility “will be taken into consideration as long as it is a real and substantial possibility and not mere speculation”: Athey [27]. It is clear that the sourcing the product from Estevé would not meet this threshold. Barnes J held that the Estevé product was not an available NIA because Estevé had entered into an exclusive North American licence with Mylan, and Mylan would have had to waive its rights for Estevé to supply Apotex. On the facts. Barnes J held that “[t]he likelihood that Mylan would have waived its Canadian rights in favour of a significant competitor seems very remote” [169]. With respect to the post-infringement alternatives developed for litigation, Barnes J expressly applied on the balance of probabilities test, but my sense from his discussion is that those alternatives did not rise beyond speculation.

1 It is contrary to economic logic to suppose that the parties would have left money on the table by failing to make a deal, and Barnes J remarked that “Evidence in the form of an economic model would have been more persuasive than this kind of hypothetical anecdotalism" [192].

NIA Developed Solely for Litigation

AstraZeneca Canada Inc v Apotex Inc 2017 FC 726 Barnes J [Omeprazole Accounting]
            1,292,693 / omeprazole formulation / LOSEC

In the accounting of profits portion of this bifurcated trial,¹ the parties settled most issues, but required determination of four specific points. The first, discussed in this post, is whether Apotex had a non-infringing alternative available during the period of infringement. The decision raises two significant issues. One is whether an infringer must know at the time of the infringement that the NIA is non-infringing, for it to be considered available. More generally, this case is novel in that Apotex attempted to establish case an NIA “defence”² based solely on alternatives which had been developed only for the purposes of litigation [24], [92]. This contrasts with the leading cases to date, Lovastatin FCA 2015 FCA 171 and Perindopril FCA 2017 FCA 23. In Lovastatin (see here) the putative NIA had actually been developed and commercialized by Apotex prior to the infringement; in Perindopril (here) the issue involved export of infringing product made in Canada, and the NIA was that the product would have been exported to the same countries, and made by the same process in other jurisdictions where it was not patented. In the leading US decision, Grain Processing 185 F.3d 1341 (Fed. Cir. 1999), the alternative did not actually exist at the date of infringement, but was commercialized almost immediately after infringement was established. In this case, in contrast, the putative NIAs were seven alternative formulations which Apotex never commercialized and has no intention of ever commercializing [24]. They were developed solely for the purpose of arguing that they could and would have been commercialized in the but for world.

Apotex won on the law, but lost on the facts. Barnes J held that these types of alternatives could in principle be considered, but he found that Apotex failed to establish that the particular alternatives it developed would have been commercializable, or that they would have received regulatory approval. While this ultimately turned on the specific facts of the case, there is perhaps a broader lesson. The testing of the alternative formulations that was done in this case fell far short of what would be required for regulatory approval. The tests used to predict both bioequivalency and stability were appropriate for use in a formulation screening exercise, but this was far from enough to persuade Barnes J that the formulations would probably have been approved and commercially successful [139], [146]. This suggests that while post-infringement NIAs are acceptable in principle, it will be difficult for a generic to surmount the necessary evidentiary hurdles to establish the NIA on the facts. Apotex also failed to establish it would have sourced non-infringing product from a third party (which I will discuss tomorrow) [196]. On the whole, this decision should give comfort to patentees who were concerned that the acceptance of the NIA defence would open the floodgates to speculative defences.

On the law, AstraZeneca made three arguments of principle. First, relying on MacKay J’s decision in Wellcome v Apotex (TMP) (1998), 82 CPR (3d) 466, [32]-[33}, it argued that a valid NIA must be perceived or known by the infringer to be non-infringing at the point of the infringement [12]. [13]. To simplify slightly, in TMP the final product, TMP, could be made by two processes, both of which were patented by Wellcome. At trial, one of the process patents was held to be valid and infringed, but the other was held to be invalid. Apotex argued that it – or more precisely, its suppliers – could have used the process protected by the invalid patent. MacKay J rejected this argument, saying “there is really no evidence that at the time the product was acquired there was available product then known to be non-infringing” [33]. In part this was because the alternative patent was not then known to be invalid, and in part because Apotex did not know which process was used by its suppliers. On the whole, though the discussion is brief and somewhat cryptic, TMP does seem to me to support AstraZeneca’s argument. Barnes J distinguished TMP on the basis that MacKay J also considered whether Apotex “could have known” [14]. I don’t find this distinction entirely persuasive. MacKay J’s point, as I read it, is that not only did Apotex not actually know, it might not have been possible for it to know – this reinforces the importance of knowledge, rather than diminishing it. In any event, Barnes J did accept that knowledge is relevant, saying “[k]nowing whether or not a proposed NIA would infringe is, of course, a factor in determining whether the infringer ‘would have’ employed it in place of the infringing product” [14], though “this falls well short of making prior knowledge of non-infringement an absolute pre-requisite to the assertion of a NIA” [13]. Thus, Barnes J agreed with MacKay J that knowledge that the NIA is non-infringing is relevant, and the difference between them, if any, is whether it should be a complete bar.

But why should it be relevant at all? As Barnes J noted, it apparently follows from the “would have” branch of the test for availability, evidently on the notion that the infringer – eg Apotex in TMP – would not have known to insist that its suppliers use the non-infringing alternative because it did not know that it was non-infringing. But this seems dubious in principle, as this approach allows an invalid patent to shield behind a valid one. To go back to first principles, the reason alternatives are considered is that the return to a patentee should be commensurate with the value of the patented technology, which is equal to its value as compared with the best non-infringing alternative: Lovastatin FCA [56]. A technology may be innovative and patentable, yet not valuable, if the product is no better or cheaper than a mundane alternative. If the infringer must know that a patent is invalid before that technology can be used as an alternative, the patentee can improperly inflate the apparent value of the innovative technology by patenting obvious technologies that serve the same end, even though those patents are ultimately invalidated. This is a kind of remedial evergreening that is not addressed by the usual expedient of invalidating the offending patents. It will be interesting to see how the law continues to develop on this point.

AstraZeneca also argued that an NIA “must be ‘foreseeable’ to the infringer at the relevant time” [13], citing Lovastatin FCA [93]-[94]. Barnes J dismissed this as a “stray reference” [15], saying

If foreseeability meant that the infringer must have the asserted NIA in mind at the time of the infringement, it could potentially punish those who had no idea their product was infringing while rewarding those who had an appreciation of the risk and courted it, but nevertheless had a back-up, work-around solution available.

Barnes J’s observation strikes me as compelling.

Finally, citing Grain Processing 185 F 3d 1341 (Fed Cir 1999) and Micro-Chemical 318 F 3d 1119 (Fed Cir 2003), AstraZeneca argued that an NIA “requiring the infringer to ‘invent around the patented technology’ is not considered to be ‘available’ to the infringer” [16]. Barnes J rejected this, saying that cases stand only for the proposition that “[t]he time and effort of coming up with a non-infringing solution is certainly relevant to whether the infringer would have pursued it, but they are not absolute barriers to the defence” [16]. That conclusion strikes me as both a correct reading of those cases, and sound as a matter of principle.

In conclusion, Barnes J held that as a matter of law:

in the hypothetical, but for pharmaceutical world the infringer’s failure to produce a viable NIA formulation in the real world is not a threshold bar to the use of the NIA defence . [18]

The correct question is simply “Could the infringer have made the product had it attempted to do so at the relevant time and would the infringer have sold the product on some reasonable financial basis in substitution for the infringing product?” [18].

While the law was largely decided in Apotex’ favour, Barnes J pointed out that post-infringement development of an NIA may present serious problems of proof, which were manifest in this case [20].

One general point is that the Court should be wary of hindsight bias when assessing the availability of post-infringement development of an NIA [21], in the same way as the Court must be wary of hindsight bias was assessing an obviousness attack.

But this case did not turn on hindsight bias. It turned on more basic evidentiary problems:

[24] When a pharmaceutical NIA has been created and has obtained regulatory approval, one is not left to wonder whether it “could” have been available for use (assuming a capacity to obtain it in commercial amounts). In this case, however, Apotex’s self-created NIAs were made in non-commercial batches, without full stability, bioequivalency or clinical studies, and without obtaining the required regulatory approvals for commercial use.

Nontheless, Barnes J did not dismiss Apotex’ tests out of hand, but at the end of the day, the data presented by Apotex was flawed and speculative in many respects: “shortcuts like the ones employed by Apotex may be acceptable in the early stages of product selection, but they are entirely unacceptable in the context of proving the viability of a NIA for the purpose of this case” [143]. For much the same reasons, Apotex could not establish that its proposed alternatives would have received regulatory approval [144]-[152].

1 The liability portion is Apotex Inc v AstraZeneca Canada Inc 2017 FCA 9 var’g 2015 FC 322 as amended by 2015 FC 671: see FCA Claim Construction FCA Overbreadth FC Product Claim FC Foreign Issue Estoppel

2 I don’t like the term NIA “defence” because in most circumstances it does not serve as a complete defence, but only to reduce the quantum that would otherwise be awarded. Nonetheless, the term is convenient, and it seems to have become established, so I will use it, albeit with this caveat.

What Does It Matter If There Is No NIA?

Airbus Helicopters S.A.S. v. Bell Helicopter Textron Canada Limitée 2017 FC 170 Martineau J
            2,207,787 / helicopter landing gear

The hot topic in Canadian remedies law lately has been the role of the “non-infringing alternative” or “NIA” in assessing monetary remedies. The legal test for an NIA was set out in Lovastatin 2015 FCA 171 (discussed here and here), and modified by Perindopril 2017 FCA 23 (here). Consequently, it is not surprising that Martineau J’s analysis began with an extended discussion of the issue, concluding on the facts that there was no valid NIA [171]-[214]. But it is a bit odd that in his actual assessment of damages, reviewed in yesterday’s post, his conclusion that there was no valid NIA concept played no particular role in his analysis. In this post I’ll suggest that when reasonable royalties are claimed, there is always a valid NIA; the NIA is, by definition, whatever the infringer would have done in the ‘but for’ world. This means that whether or not an NIA is explicitly identified, we can always work backwards from the damages assessment to figure out the implicit NIA. I’ll also suggest that it probably is not usually helpful to start by applying the modified Lovastatin test to identify the legally available NIA. Rather, it is normally better to start with the key factual question – what would the infringer have done but for the infringement? – and then apply the Lovastatin test to ask whether that NIA-in-fact is also an available NIA-in-law.

Instantaneous Availability of Non-Infringing Alternative

Apotex Inc. v. ADIR 2017 FCA 23 Dawson JA: Boivin, Woods JJA rev’g in part 2015 FC 721 Gagné J
            1,341,196 / perindopril / COVERSYL

In its Perindopril Accounting decision, the FCA has once again affirmed the centrality of the differential profits approach to causation, and in particular the need to consider any non-infringing alternatives (NIA) that would have been used by the infringer but for the infringement. This decision builds on the foundational authority of Monsanto v Schmeiser, 2004 SCC 34, and the FCA’s subsequent decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161. The FCA decisions since Schmeiser have consistently affirmed the basic principle that it is necessary, not optional, to consider any non-infringing alternative in the causation analysis (as discussed here, here and here). There have, however, been some refinements in the details. In Venlafaxine, as discussed here, the FCA developed the principles relating to the burden of proof. And now, in Perindopril, the FCA has apparently retrenched from its earlier position that an NIA could be considered only if it was “instantaneously” available.

This case is the accounting of profits portion of a bifurcated trial. In the liability decision, Laboratoires Servier v Apotex Inc, 2008 FC 825 aff’d 2009 FCA 222, Snider J held that the defendants had infringed the plaintiff’s ‘196 patent and she allowed the plaintiff to elect an accounting of profits. A substantial amount of the infringing material manufactured by Apotex in Canada was destined for export to markets such as the UK and Australia. Apotex had argued that there were a number of viable, non-infringing alternative sources of both bulk perindopril API and perindopril tablets (in particular manufactured in jurisdictions other than Canada) [18] [FC 79]-[80]. Apotex argued that the profits it would have made by manufacturing abroad (the non-infringing alternative), should be deducted from the profits actually made by the infringing manufacture in Canada, to arrive at the profits to be disgorged [18], [FC 121]. As I explained here, Gagné J rejected consideration of potential the non-infringing alternatives as a matter of law [25], [FC 126] and Apotex appealed this point [8.i].

The FCA has now held that “the Federal Court erred in law by rejecting the relevance at law of any available non-infringing perindopril” [9]. This is not very surprising. Gagné J’s decision was released prior to the FCA decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161, in which the FCA affirmed the need to consider any non-infringing alternative in the causation analysis (as discussed here, here and here), in light of Schmeiser, 2004 SCC 34. This Perindopril Accounting decision reaffirms the same point.

Perindopril Accounting is nonetheless significant in a few respects. First, Lovastatin Damages and Venlafaxine s8 were both damages cases, while Perindopril is an accounting case. The damages cases were in some ways more debatable, as Schmeiser, which established the NIA analysis, was an accounting of profits decision, and it was argued that the reasoning did not apply in the damages context. Lovastatin Damages [60] held that the basic causation analysis is the same in both contexts, and this point has now been reaffirmed in Perindopril: “While Lovastatin considered a claim for compensatory damages for patent infringement, the comments have equal application to an accounting for profits” [34] (and to the same effect, [40]). Thus it is now perfectly clear that NIA analysis is equally applicable in both the damages and accounting contexts. This is undoubtedly correct, as the causation inquiry is fundamentally the same in either context. As the SCC explained in the accounting context, “A comparison is to be made between the defendant’s profit attributable to the invention and his profit had he used the best non-infringing option” Schmeiser [102]. The only change in the damages context is to substitute the words “plaintiff’s profits” in place of “defendant’s profits.”

While Gagné J recognized that Schmeiser had endorsed the NIA analysis, she noted that the SCC has stated only that the differential profits approach is the “preferred” method, and consequently Gagné J felt that the SCC had left it open to the courts to apply a different approach on the facts of a particular case [FC 118-19]. The FCA acknowledged that [28, my emphasis]:

in Schmeiser the Supreme Court referred to the differential profit approach as the ‘preferred means’ of calculating an accounting of profits – not the only means. However, at bottom is the need to ensure that a patentee only receives that portion of the infringer’s profit that is causally attributable to the invention

In my view, this is entirely correct. It is necessary, as a matter of law, that the profits (whether those of the infringer or the patentee) are only those which are causally attributable to the infringement. The differential profit analysis, including consideration of the NIA, is the best way of implementing this fundamental causation requirement. Other ways of implementing the same causation analysis may be permitted, but it is not open to the courts to use an approach which ignores the causation requirement.

The FCA did state that “in this circumstance” it was an error for the Federal Court not to take into account the NIA (the availability of non-infringing perindopril for export), [28], [30]. This leaves open the question of exactly when it might be appropriate not to use the differential profits analysis. In my view, it is understandable that the SCC and the FCA would not want to set down a strict rule that must be applied regardless of the vagaries of the case at hand. I would suggest that the main, and perhaps only, circumstances in which it need not be used is when it is clear that not all of the profits at issue are attributable to the infringement, and yet the evidence does not allow a differential profit analysis. Lubrizol [1997] 2 FC 3 (FCA), might be an example. But what is essential, as per the above underlined statement by the FCA, is that the causation requirement be respected. Given that the differential profits approach, including the NIA, is the best method for implementing the causation requirement, I would suggest that it must be used whenever the evidence allows it.

So far, this is all to clarify or reinforce the law as set out in Schmeiser, Lovastatin Damages and Venlafaxine s8. There is one important new development. In Lovastatin the FCA held that an in order to be considered in the differential profit analysis, the NIA had to be available “instantaneously”:

[79] Dealing first with whether Apotex could have sold non-infringing lovastatin, Merck argues that the alleged alternative must have been actually available to replace Apotex’ infringing sales as they were made. Otherwise, Merck, not Apotex, would have replaced those sales. I believe this submission to be correct both in fact and in law. In Advanced Building Systems Pty Ltd et al. v. Ramset Fasteners (Aust) Pty Ltd, [2001] FCA 1098, (2001) 52 I.P.R. 305 the Federal Court of Australia rejected the relevance of a non-infringing alternative, but held that if it was legally relevant, it could only apply “if at the moment of infringement […] there is available on the market instantaneously the appropriate substitute” in the reconstituted market. I agree.

This is in sharp contrast with Perindopril Accounting. In the result, the FCA held that the issue of whether Apotex “would have and could have” obtained quantities of non-infringing perindopril from other sources for sale abroad, should be remitted to the Federal Court for determination on the facts [65]. The FCA further directed the Federal Court as follows (my emphasis):

[67] [I]t may be that the Federal Court could conclude in the hypothetical world that one or more suppliers would not or could not supply perindopril in time to replace the initial infringing sales. However, this would not end the inquiry as the Federal Court would still have to consider whether at some later point in time a supplier would and could have provided replacement non-infringing tablets.

I don’t see how the two statements can be reconciled, but both decisions were written by Dawson JA, so I can’t see this as a disagreement between different panels of the court. Instead, it appears to be a significant retrenchment from the “instantaneous availability” test for an NIA set out in Lovastatin. This is a welcome development, because, in my view, as explained here, the “instantaneous availability” test is inconsistent with the fundamental principle of “but for” causation.

Overall, then, Canadian law on causation and non-infringing alternatives is shaping up very well. Lovastatin took a large step in the right direction, and Venlafaxine and Perindopril have made modest course corrections to bring the law onto the right path. This is how the common law is supposed to work.

I do see one issue which may require further consideration (though it was wasn't raised at all in this case.) That is the question of whether the but for world should be approached as one world, established on the balance of probabilities, or multiple worlds considered in terms of weighted possibilities. In both Lovastatin and Venlafaxine the FCA held that the burden lies on the defendant to establish the factual relevance of a non-infringing alternative “on the balance of probabilities. Mere possibilities short of probabilities do not suffice” Venlafaxine [56] (and to the same effect Lovastatin [74]). On its face this is a sensible position, and the FCA cited as authority Rainbow Caterers [1991] 3 SCR 3, 14, which does indeed say that the but for world must be established “on a balance of probabilities.” The problem is that this is difficult to reconcile with Athey v Leonati [1996] 3 SCR 458 (citations omitted):

[27] Hypothetical events (such as how the plaintiff’s life would have proceeded without the tortious injury) or future events need not be proven on a balance of probabilities. Instead, they are simply given weight according to their relative likelihood. For example, if there is a 30 percent chance that the plaintiff’s injuries will worsen, then the damage award may be increased by 30 percent of the anticipated extra damages to reflect that risk. A future or hypothetical possibility will be taken into consideration as long as it is a real and substantial possibility and not mere speculation.

The “but for” world is a hypothetical event; how the plaintiff’s life would have proceeded without the tortious injury is the equivalent, in the personal injury context, of how the patentee’s market would have developed without the infringement. Thus Athey directly implies that the defendant need not establish the relevance of the NIA on the balance of probabilities; if there is a 30% chance that the infringer would have been able to supply the market with an NIA, then the profits to be disgorged should be reduced by the same percentage.

The FCA in Venlafaxine [56] also cited Tervita 2015 SCC 3, [49]-[51], [66], citing F.H. v. McDougall, 2008 SCC 53, [40], [49]. I don’t think these are relevant. As Athey also stated (citations omitted)

[28] By contrast, past events must be proven, and once proven they are treated as certainties. In a negligence action, the court must declare whether the defendant was negligent, and that conclusion cannot be couched in terms of probabilities. Likewise, the negligent conduct either was or was not a cause of the injury. The court must decide, on the available evidence, whether the thing alleged has been proven; if it has, it is accepted as a certainty:

As I understand it, there is a distinction between proving the wrong and assessing damages. The wrong itself is always proven on the balance of probabilities, and, as I understand it, that was the point in Tervita and McDougall. That is not inconsistent with assessing damages using weighted probabilities.

But Rainbow Caterers is certainly directly relevant, and it is not clear to me how to reconcile that case with Athey v Leonati. To the extent that there is a conflict between the two cases, Athey is probably the stronger authority. In Rainbow Caterers the choice was between two 'but for' worlds, one proposed by the plaintiff and the other by the defendant, and it does not appear that the option of taking both possibilities into account on the basis of their relative likelihood was before the court. In Athey, in contrast, that was a central question. Moreover, probability based adjustments for hypothetical events (eg the crumbling skull doctrine) and future contingencies are routine in the tort context, particularly in personal injury cases. With that said, neither approach is obviously superior in principle, and the Rainbow Caterers approach has the practical advantage of simplicity. My only conclusion at this point is that the problem of whether the 'but for' world should be constructed on a balance of probabilities, or with weighted possibilities, is a difficult one. It may be that the two approaches can indeed be reconciled; or that one is superior in principle; or that there is some sound reason for using a different approach in patent law than in tort law.